August 3, 2020
Posted 9:45 AM ET - Last Friday the market rallied on strong earnings reactions from big tech companies. This was an important day for the market and mediocre results would have sparked profit-taking. Stocks finished on the high of the day and the S&P 500 is up 20 points before the open. I feel that the upside rewards are much smaller than the downside risks. Apple and Facebook rallied to new highs and they are part of an elite group. Ten companies in the S&P 500 are up 35% on average this year. The other 490 companies are down an average of 10% More than half of the S&P 500 has reported and on average revenues are down 8.2% and profits are down 30%. This was supposed to be a down quarter and Q3 was going to benefit from a "V" bottom recovery. That has not happened and I could argue that we are in worse shape now. The Coronavirus is spreading at a rapid pace and states are retreating to Phase 2/Phase 3. Consumer spending will be negatively impacted as workers question their job security. Republicans and Democrats are not close to a new stimulus plan and the only thing we know at this stage is that it will be much smaller than the $6 trillion that was spent over the last few months. They will get a deal done at the final hour and then they will flee DC during recess. The market will get very nervous as the economy struggles and its leaders take a vacation. China reported that manufacturing PMI (Caixin) increased to 52.8. That is a significant improvement and China is the litmus test since it reopened its economy months earlier than we did. They have extreme restrictions and very tightly controlled quarantine procedures. Consequently, their recovery is not hampered by the virus like ours is. The economic recovery is taking much longer than expected and with each passing week the chances of credit issues increases. I was just reading that retail space on Fifth Avenue is currently going for less than $700 per square foot (down from $3000 per square foot) and many businesses are not paying rent. This is a microcosm of what's happening in other major cities. Many industries will forever be changed by the Coronavirus. Unfortunately, tech does not account for the majority of our employment. Retail, restaurant, hotel, transportation, energy and finance are all labor-intensive businesses and these companies are struggling. The PPP is running out and employers will have to lay off workers. The evidence is mounting and I am seeing many "cracks in the dam". Money printing is keeping the market afloat as cash tries to find a home. Uncertainty is rising and the rally into tech (stay at home play) could be a flight to safety. Swing traders who can't monitor the market during the day should be on the sidelines. Market declines in a bull market are tough to trade in the snapback rallies are violent. Your best play will be to remain on the sidelines and to wait for a buying opportunity once support is established. That could take a few weeks or longer. Once we see that washout we will evaluate the economic backdrop and determine if it's time to sell out of the money bullish put spreads. Day traders can try to ride the last leg of this rally, but be careful on the long side. I feel that we are likely to move higher in a very choppy fashion and there will be opportunities on both sides. When I see late day selling with follow-through the next day I will know that a top is near. I feel that we will see a decent drop in the next 2 weeks. Support is at SPY $320 and resistance is at $327 and the all-time high. . .
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